Britain's broken pension system: How unfair rules cost David Burnett thousands of pounds in income

Forklift driver David Burnett has lost thousands of pounds in income after becoming a victim of the broken pension system.

For 31 years, despite only having a small salary, Mr Burnett had put money away for his retirement. He had built up a pot of £16,734 — which isn’t much — so he needed it to go as far as possible.

But though he did everything he should have done, he faces retirement with a much smaller pension than he deserves.

And by the strict letter of the rules, no one is to blame.

His case dramatically highlights why Money Mail has called for the City watchdog — the Financial Services Authority — and the Pension Regulator to monitor retirement payouts.

Mr Burnett, 65, was caught out by baffling regulations about how savers turn their pensions into an income.

When this happens, insurance companies are meant to tell retirees how much they can get each year for the money they have built up.

All firms offer a standard income, known as an annuity, based on how long the average man or woman is expected to live. Anyone who has been ill, smokes or takes regular medication can get a better payout, called an enhanced annuity.

Mr Burnett has smoked up to 20 cigarettes a day for 50 years and has a history of high blood pressure and cholesterol, for which he takes three tablets a day. In a retirement pack sent before his 65th birthday in October, he was told by his insurer Prudential that it offered bigger payouts to those with an illness or who smoke.

Mr Burnett, from Enfield, North London, tried to claim, but Prudential rejected his application, saying his conditions ‘did not qualify’.

He thought this meant his illness wasn’t serious enough, so accepted a standard deal of £948 a year.

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Once you sign up to an annuity, the decision cannot be reversed, and he is committed to taking this until he dies. But he now knows that if he’d looked at rival firms, he could be on £1,131 a year — a fifth more.

Mr Burnett, who worked for J. W. Spear & Sons, the Scrabble board maker, says: ‘How ill do I have to be to get one of these enhanced annuities?

‘Not once did the Prudential tell me I might qualify at another insurer. It should be in black and white so everyone can read it, but, no, they keep it from you.’

For the past 12 weeks, Money Mail’s Get Britain Saving campaign has called for tough regulations to stamp out a £1 billion pension scandal hammering the elderly.

Around 400,000 people a year buy an annuity and thousands are locked into shoddy rates by insurers that fail to make clear how vital it is shop around.

The situation is so desperate that industry body, the Association of British Insurers (ABI), has given the big pension providers one year to mend their ways.

Unclear: David Burnett felt Prudential did not make it clear that he could find a better annuity deal if he shopped around.

It has also drawn up a code, which should make clear that anyone with a medical condition ought to look for a better deal. Yet by the letter of this code, Prudential has done nothing wrong in the way it rejected Mr Burnett.

Despite telling him he was free to shop around, Prudential never explained it didn’t cover as many conditions as its rivals. Advisers such as Better Retirement Group or Annuity Direct could have found him 20 per cent more income.

Money Mail believes it is vital that the Financial Services Authority monitors pension payouts and imposes tough compulsory rules to ensure no pensioner is deprived of vital income.

As part of this, sick retirees who are rejected for an enhanced payout must be told they may still qualify at rival firms.

And the rules must include the 2.5 million people in company pensions run by trustees and overseen by the Pensions Regulator.

Bob Bullivant, chief executive of Annuity Direct, says: ‘We regularly find that customers qualify for an enhanced annuity at one insurer, but get turned down by the rest.

‘At other times, there is a difference of thousands of pounds between the best and second-best quote for the same person. It goes to show how vital it is to shop around the whole of the market.’

Prudential says: ‘We were very clear in our correspondence with Mr Burnett regarding the annuities that were available to him, including enhanced options.

‘In this instance, having reviewed Mr Burnett’s medical questionnaire, we were unable to offer him an enhancement, based on the underwriting criteria we use for writing such policies.

‘The letter in the wake-up pack we send to all customers mentions the importance of shopping around, irrespective of their circumstances.’

The ABI says insurers who cover only a small number of medical conditions ought to ‘point customers to a shopping around service’ under its new rules.